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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 8, 2000 Commission File No. 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
10400 Fernwood Road
Bethesda, MD 20817-1109
(301) 380-9000
Delaware 52-1605434
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(State of Organization) (I.R.S. Employer Identification Number)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ____.
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Marriott Residence Inn II Limited Partnership
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION (Unaudited)
Condensed Consolidated Balance Sheets
September 8, 2000 and December 31, 1999................................................. 1
Condensed Consolidated Statements of Operations
Twelve and Thirty-Six Weeks Ended September 8, 2000 and September 10, 1999.............. 2
Condensed Consolidated Statements of Cash Flows
Thirty-Six Weeks Ended September 8, 2000 and September 10, 1999......................... 3
Notes to Condensed Consolidated Financial Statements..................................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 7
Quantitative and Qualitative Disclosures about Market Risk............................... 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 10
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Balance Sheets
(in thousands)
September 8, December 31,
2000 1999
----------- -----------
(Unaudited)
ASSETS
Property and equipment, net....................................... $ 138,774 $ 140,524
Due from Residence Inn by Marriott, Inc........................... 3,863 3,424
Deferred financing costs, net of accumulated amortization......... 2,276 2,562
Property improvement fund......................................... 3,212 466
Restricted cash reserves.......................................... 6,746 6,654
Cash and cash equivalents......................................... 22,100 19,039
--------- ---------
$ 176,971 $ 172,669
========= =========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt..................................................... $ 134,773 $ 135,933
Incentive management fee due to Residence Inn by Marriott, Inc.... 24,836 22,693
Accounts payable and accrued expenses............................. 2,252 2,247
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Total Liabilities............................................. 161,861 160,873
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PARTNERS' CAPITAL
General Partner................................................... 229 196
Limited Partners.................................................. 14,881 11,600
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Total Partners' Capital....................................... 15,110 11,796
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$ 176,971 $ 172,669
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See Notes to Condensed Consolidated Financial Statements.
1
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except Unit per Unit amounts)
Twelve Weeks Ended Thirty-Six Weeks Ended
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
--------------- ------------ ------------ ------------
REVENUES
Inn revenues
Suites........................................ $ 16,698 $ 15,957 $ 49,211 $ 48,430
Other......................................... 764 831 2,400 2,544
--------------- ------------- ------------ -------------
Total Inn revenues........................... 17,462 16,788 51,611 50,974
--------------- ------------- ------------ -------------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites........................................ 4,288 4,081 12,430 11,892
Other department costs and expenses........... 578 483 1,563 1,424
Selling, administrative and other............. 4,945 4,532 14,203 13,635
--------------- ------------- ------------ -------------
Total Inn property-level costs and expenses.. 9,811 9,096 28,196 26,951
Depreciation................................... 1,598 1,623 4,906 4,939
Incentive management fee....................... 703 790 2,143 2,365
Residence Inn system fee....................... 669 638 1,969 1,937
Property taxes................................. 506 498 1,581 1,609
Equipment rent and other....................... 195 231 978 821
Base management fee............................ 349 335 1,032 1,019
--------------- ------------- ------------ -------------
Total operating costs and expenses........... 13,831 13,211 40,805 39,641
--------------- ------------- ------------ -------------
OPERATING PROFIT................................ 3,631 3,577 10,806 11,333
Interest expense............................... (2,881) (2,916) (8,668) (8,805)
Interest income................................ 473 328 1,176 736
--------------- ------------- ------------ -------------
NET INCOME...................................... $ 1,223 $ 989 $ 3,314 $ 3,264
=============== ============= ============ =============
ALLOCATION OF NET INCOME
General Partner................................ $ 12 $ 10 $ 33 $ 33
Limited Partners............................... 1,211 979 3,281 3,231
--------------- ------------- ------------ -------------
$ 1,223 $ 989 $ 3,314 $ 3,264
=============== ============= ============ =============
NET INCOME PER LIMITED
PARTNER UNIT (70,000 Units).................... $ 17 $ 14 $ 47 $ 46
=============== ============= ============ =============
See Notes to Condensed Consolidated Financial Statements.
2
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Thirty-Six Weeks Ended
September 8, September 10,
2000 1999
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OPERATING ACTIVITIES
Net income.............................................. $ 3,314 $ 3,264
Depreciation............................................ 4,906 4,939
Amortization of deferred financing costs................ 286 285
Amortization of deferred incentive management fees...... 2,143 2,256
Loss on sale of fixed assets............................ 64 --
Changes in operating accounts........................... (277) (1,323)
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Cash provided by operating activities............... 10,437 9,421
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INVESTING ACTIVITIES
Additions to property and equipment, net................ (3,220) (4,019)
Change in property improvement fund..................... (2,746) (2,414)
Change in restricted cash reserves...................... (250) (250)
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Cash used in investing activities................... (6,216) (6,683)
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FINANCING ACTIVITIES
Repayment of mortgage debt.............................. (1,160) (1,094)
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Cash used in financing activities................... (1,160) (1,094)
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INCREASE IN CASH AND CASH EQUIVALENTS.................... 3,061 1,644
CASH AND CASH EQUIVALENTS at beginning of period......... 19,039 14,553
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CASH AND CASH EQUIVALENTS at end of period............... $ 22,100 $ 16,197
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest......................... $ 8,124 $ 8,190
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See Notes to Condensed Consolidated Financial Statements.
3
Marriott Residence Inn II Limited Partnership
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
Marriott Residence Inn II Limited Partnership, a Delaware limited partnership
(the "Partnership"), was formed on November 23, 1988 to acquire and own 23
Marriott Residence Inn properties (the "Inns") and the land on which the Inns
are located. The Inns are located in 16 states and contain a total of 2,487
suites as of December 31, 1999. The Partnership commenced operations on
December 28, 1988. The Inns are operated as part of the Residence Inn by
Marriott system and are managed by Residence Inn by Marriott, Inc. (the
"Manager"), a wholly-owned subsidiary of Marriott International, Inc.
2. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of the
Partnership have been prepared without audit. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. The Partnership believes the disclosures made are
adequate to make the information presented not misleading. However, the
unaudited condensed consolidated financial statements should be read in
conjunction with the Partnership's consolidated financial statements and notes
thereto included in the Partnership's annual report on Form 10-K for the year
ended December 31, 1999.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Partnership as of September 8, 2000, the
results of operations for the twelve and thirty-six weeks ended September 8,
2000 and September 10, 1999, and cash flows for the thirty-six weeks ended
September 8, 2000 and September 10, 1999. Interim results are not necessarily
indicative of full year performance because of the impact of seasonal and short-
term variations.
For financial reporting purposes, net income of the Partnership is allocated 99%
to the limited partners and 1% to RIBM Two LLC (the "General Partner").
Significant differences exist between the net income for financial reporting
purposes and the net income for federal income tax purposes. These differences
are due primarily to the use, for federal income tax purposes, of accelerated
depreciation methods and shorter depreciable lives of the assets, and
differences in the timing of the recognition of incentive management fee
expense.
Certain reclassifications were made to the prior year unaudited condensed
consolidated financial statements to conform to the current presentation.
3. Amounts Paid to the General Partner and Marriott International, Inc.
The chart below summarizes amounts paid to the General Partner and Marriott
International, Inc. for the thirty-six weeks ended September 8, 2000 and
September 10, 1999 (in thousands):
Marriott International, Inc.:
2000 1999
-------- --------
Residence Inn system fee....................... $ 1,969 $ 1,937
Chain services and Marriott Rewards Program.... 1,457 1,276
Marketing fund contribution.................... 1,230 1,207
Base management fee............................ 1,032 1,019
Incentive management fee....................... -- 109
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$ 5,688 $ 5,548
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General Partner:
Administrative expenses reimbursed............. $ 160 $ 78
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4
Marriott Residence Inn II Limited Partnership
Notes to Condensed Consolidated Financial Statements
(Unaudited
4. Contingencies
The Partnership and the Inns are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition or results of operations of the Partnership.
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in several
limited partnerships sponsored by Marriott Corporation ("Host Marriott") or its
subsidiaries filed a lawsuit, Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County Texas, alleging that the
defendants conspired to sell hotels to the partnerships for inflated prices and
that they charged the partnerships excessive management fees to operate the
partnerships' hotels. A Marriott International subsidiary manages each of the
hotels involved and, as to some properties, Marriott International, or one of
its subsidiaries, is the ground lessor and collects rent. Host REIT, Marriott
International, several of their subsidiaries, and J.W. Marriott, Jr. are among
the various named defendants. The Haas lawsuit originally involved the
following partnerships:
1.) Courtyard by Marriott Limited Partnership ("CBM I");
2.) Courtyard by Marriott II Limited Partnership ("CBM II");
3.) Marriott Residence Inn Limited Partnership ("Res I");
4.) Marriott Residence Inn II Limited Partnership ("Res II");
5.) Fairfield Inn by Marriott Limited Partnership ("Fairfield");
6.) Desert Springs Marriott Limited Partnership ("Desert Springs"); and
7.) Atlanta Marriott Marquis Limited Partnership ("AMMLP").
Host Marriott has settled the claims of the AMMLP unitholders as part of a
settlement of a separate class action suit, pursuant to which settlement Host
Marriott paid $4.25 million in return for a release of all claims. This
settlement, which has been finalized, is not contingent on any portion of the
Partnership Litigation Settlement, discussed more fully below. In addition, we
consummated settlements with the unitholders of Res I, Res II, Fairfield and
Desert Springs, under the umbrella of the Partnership Litigation Settlement.
Pursuant to the terms of the Partnership Litigation Settlement, CBM I and CBM II
are currently subject to the tender offers which have been approved by the
necessary percentages of the partnerships' limited partners and the court in
their respective fairness hearings and are discussed in public filings by these
partnerships. The settlements also remain subject to receiving third party
consents which have not been obtained as of this filing. The completion of these
tender offers will release Host Marriott and the other defendants from all
claims by CBM I and CBM II unitholders who have not opted out of these
settlements. The holders of fewer than three units have elected such treatment.
Partnership Litigation Settlement. On March 9, 2000, Host Marriott and Marriott
International entered into a settlement agreement that will resolve the Texas
Multi-Partnership, the CBM II and the CBM I litigation. Under this settlement,
Host Marriott and Marriott International have settled with the Res I, Res II,
Fairfield and Desert Springs Plaintiffs for an aggregate payment of
approximately $62 million (of which Host Marriott and our subsidiaries have paid
approximately $31 million) in return for a general release of all claims. The
Res I, Res II, Fairfield and Desert Springs settlements were severed from the
CBM I and CBM II settlements by a court order dated September 25, 2000. This
settlement is subject to a thirty day appeal period beginning September 28,
2000, during which time any class members can appeal the settlement.
As a result of the proposed settlement of the above discussed litigation, each
limited partner who did not opt out of the settlement will receive per limited
partner unit approximately $229. As of October 20, 2000, no partner has opted
out of the settlement. The amount will be further adjusted for plaintiffs
5
Marriott Residence Inn II Limited Partnership
Notes to Condensed Consolidated Financial Statements
(Unaudited
counsel's legal fees and expenses, which will result in each limited partner
unit receiving a net distribution of approximately $151. In addition to the cash
payments, the Manager waived $22,693,000 of deferred management fees. Except for
the waiver of the deferred management fees, the settlement does not disturb the
terms of the long-term management agreements.
The details of the settlement are contained in a court-approved notice which was
mailed to the Partnership's limited partners during the week of June 19th, and
the discussion of the settlement herein is qualified in its entirety by the
terms of the actual court-approved notice sent to the Partnership's limited
partners.
6
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology, such as
"believes," "expects," "may," "will," "should," "estimates," or "anticipates,"
or the negative thereof or other variations thereof or comparable terminology.
All forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our actual transactions, results, performance
or achievements to be materially different from any future transactions,
results, performance or achievements expressed or implied by such forward-
looking statements. Although we believe the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, we can give no
assurance that our expectations will be attained or that any deviations will not
be material. We disclaim any obligations or undertaking to publicly release any
updates or revisions to any forward-looking statement contained in this
quarterly report on Form 10-Q to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based.
RESULTS OF OPERATIONS
Revenues. Inn revenues increased $674,000, or 4%, to $17.5 million and
increased $637,000, or 1%, to $51.6 million for the third quarter of 2000 and
through the third quarter of 2000, respectively, when compared to the same
periods in 1999 due to changes in REVPAR. REVPAR, or revenue per available room,
represents the combination of the average daily suite rate charged and the
average daily occupancy achieved. For the third quarter of 2000, REVPAR
increased 5% to $80 due to a $3, or 3%, increase in the combined average suite
rate to $94 and a 1 percentage point increase in the combined average occupancy
to 85%. Through the third quarter of 2000, REVPAR increased 2% to $79 due to an
increase in the combined average suite rate of $3, or 3%, to $94 partially
offset by a decrease in the combined average occupancy by 1 percentage point to
83%.
Operating Costs and Expenses. Operating costs and expenses increased by
$620,000 and $1.2 million to $13.8 million and $40.8 million for the third
quarter of 2000 and through the third quarter of 2000, respectively, when
compared to the same periods in 1999. As a percentage of Inn revenues, Inn
operating costs and expenses were 79% for both the third quarters of 2000 and
1999, and 79% and 78% of revenues through the third quarter of 2000 and 1999,
respectively. The increase in operating costs and expenses was primarily due to
an increase in property-level costs and expenses at the Inns as discussed below.
Inn property-level costs and expenses increased $715,000 and $1.2 million for
the third quarter of 2000 and 2000 year-to-date, respectively, when compared to
the same periods in 1999 primarily due to an increase in hourly wage and benefit
expense in order to maintain competitive wage scales. As a percentage of Inn
revenues, Inn property-level costs and expenses represented 56% and 54% for the
third quarters of 2000 and 1999, respectively, and 55% and 53% of revenues
through the third quarter of 2000 and 1999, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit remained flat at $3.6 million, or 21%
of revenues, for the third quarters of 2000 and 1999. Through the third quarter
of 2000, operating profit decreased $527,000, or 5%, to $10.8 million, or 21% of
revenues, from $11.3 million, or 22% of revenues, through the third quarter of
1999.
Interest Expense. Interest expense decreased $35,000, or 1%, and $137,000, or
2%, to $2.9 million and $8.7 million for the third quarter of 2000 and through
the third quarter of 2000, respectively, when compared to the same periods in
1999 as a result of principal amortization of the Partnership's mortgage debt.
7
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income. As a result of the items discussed above, net income increased
$234,000, or 24%, to $1.2 million, or 7% of revenues for the third quarter of
2000 compared to net income of $1.0 million, or 6% of revenues, for the third
quarter of 1999. Through both the third quarters of 2000 and 1999, net income
was $3.3 million, or comprised approximately 6% of revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. Beginning in 1998, the
Partnership's property improvement fund was determined to be insufficient to
meet current needs. The shortfall is primarily due to the need to complete
renovations and total suite refurbishments at a majority of the Partnership's
Inns. To reduce the 1998 shortfall, the Partnership provided a $2.5 million loan
to the property improvement fund in first quarter 1999 and increased the
contribution rate in 1999 to 7% of gross Inn revenues. The Partnership funded an
additional $1.6 million loan to the property improvement fund in the first
quarter 2000 to aid in the shortfall estimate for 1999.
Pursuant to the modification to the Restated Management Agreements, Residence
Inn by Marriott, Inc. (the "Manager") decreased the contribution rate to 5% of
gross Inn revenues commencing January 1, 2000. In second quarter 2000, the
contribution rate was increased by the Manager to 7% and was applied
retroactively to first quarter operating results.
A portion of the renovations mentioned above is part of the routine capital
expenditure cycle for maintaining Inns that are 10 to 16 years old. However, in
light of the increased competition in the extended-stay market, the Manager has
proposed additional improvements that are intended to enhance the overall value
and competitiveness of the Inns. These proposed improvements include design,
structural and technological improvements to modernize and enhance the
functionality and appeal of the Inns. Based upon information provided by the
Manager, approximately $50 million to $60 million may be required over the next
five years for the routine renovations and all of the proposed additional
improvements.
The General Partner believes that cash from Inn operations and Partnership
reserves will be sufficient to make the required debt service payments and to
fund a portion of the capital expenditures at the Inns. The General Partner is
reviewing the Manager's proposed Inn renovations and improvements to identify
those projects that have the greatest value to the Partnership.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operations. Its principal
uses of cash are to make debt service payments and fund the property improvement
fund.
Cash provided by operating activities was $10.4 million through the third
quarter of 2000 compared to $9.4 million for the same period in 1999. The $1
million increase was primarily due to a $900,000 increase in rental income due
to timing differences compared to the same period in 1999.
Cash used in investing activities through the third quarter of 2000 and 1999 was
$6.2 million and $6.7 million, respectively. The Partnership's cash investing
activities consist primarily of contributions to the property improvement fund,
capital expenditures for improvements to the Inns and contributions to
restricted cash reserves required under the terms of the mortgage debt.
Contributions to the property improvement fund were $5.2 million and $6.1
million through the third quarter of 2000 and 1999, respectively, while
expenditures were $3.2 million and $4.0 million through the third quarter of
2000 and 1999, respectively. The $900,000 decrease in contributions is
8
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
primarily the difference between the $1.6 million loan to the property
improvement fund made in 2000 and the $2.5 million loan made in 1999 since
revenues remained relatively stable through the third quarter of 2000 and 1999.
9
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cash used in financing activities which consisted of repayments of mortgage debt
through the third quarter of 2000 and 1999 were $1.2 million and $1.1 million,
respectively. No distributions to partners were made through the third quarter
of 2000 or 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership does not have significant market risk with respect to interest
rates, foreign currency exchanges or other market rate or price risks, and the
Partnership does not hold any financial instruments for trading purposes. As of
September 8, 2000, the Partnership's mortgage debt has a fixed interest rate.
As of September 8, 2000 and December 31, 1999, the Partnership's mortgage debt
totaled $134.8 million and $135.9 million, respectively.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference to the description of legal proceedings in footnote
four to the condensed financial statements set forth in Part I, "Financial
Information."
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
By: RIBM TWO LLC
General Partner
October 23, 2000 By: /s/ Mathew Whelan
--------------------------------------------
Mathew Whelan
Vice President
12